A diagnosis of bankruptcy for the "backbone of the nation"?

02.04.2012 — Analysis

If the industrial Sverdlovsk region doesn't start fighting for its life, it will soon face disaster. Unwilling to modernize, for many years the government hid behind excuses such as, "We're the backbone of the nation." But experts note that the region produces almost no finished products, and its facilities that produce semi-finished goods are incredibly outdated. And because of its specialized economy and geographic position, one of the biggest regions in Russia is getting little investment. This columnist for RusBusinessNews has learned that it can be as hard to change government officials as it is to alter a fixed location on a map.

The economic crisis that swept the world in 2008 made life far more complicated for uncompetitive regions. The economically undiversified Sverdlovsk region, with its antiquated engineering and metallurgical industries, falls into this high-risk group. According to Natalia Zubarevich, the director of the Independent Institute for Social Policy's (IISP) regional program, the region's future development is hard to predict, because it could so easily be disrupted by the next wave of the economic crisis.

A study conducted by the IISP showed that developed regions that have diversified industries and major cities with a strong service sector were most resilient to the global recession. But economies that were heavily dependent on a single industry, typical of many regions built around metallurgical or engineering industries, began to stagnate and their residents even saw declines in their income.

The troubled Sverdlovsk region has tried many times to diversify its economy. For example, officials in the region were in a frenzy to persuade foreign investors to begin assembling automobiles at the AMUR plant in Novouralsk. But the federal government rejected the prospective Chinese partners, and Renault and a number of other well-known foreign automakers turned down the invitation. As a result, in January of 2012, bankruptcy proceedings began at the plant that used to manufacture trucks for the military.

Natalia Zubarevich notes that foreign investors always consider the agglomeration effect and a company's geographical location before investing in a manufacturing industry. This is why the automotive giants preferred to open their assembly plants in the Kaluga and Nizhny Novgorod regions, so close to the huge Moscow market. It was not realistic for AMUR to compete for foreign investment when it is at such a distance from the capital and from any seaports.

Nor have the attempts of Sverdlovsk officials to create industrial clusters in the region been successful. Officials proclaimed the establishment of these geographically based complexes, intended for many years of collaboration, and individualized by specific industry (engineering, pharmaceuticals, etc.) But Vadim Krivorotov, a professor at the Ural Federal University, believes that clusters must be based on competition between similar companies, not on the vertical integration characteristic of holding companies. And no one has yet managed to create competition by fiat from above. Therefore it's still early to talk about clusters in the Urals dedicated to generating ideas and creating new products.

Nor is the commodities industry of the Sverdlovsk region seeing any investment. A study conducted by the analytical center for the journal Expert-Ural showed that financial infusions into the region's industry lag far behind its needs. And thus far, the preconditions that would encourage investors to focus on industry are not in place, because of the region's significantly underdeveloped investment infrastructure, declining working-age population, current low budgetary provisions per capita, etc.

Evgeny Animitsa, the chair of the Regional and Municipal Economics Department of the Ural State Economic University, says that investors are not willing to consider projects that will require more than three years for a return on their investment, because of the political and administrative risks. That is precisely why the sluggish Sverdlovsk region that is so centered around mining and metallurgy cannot compete with the regions of China and India for investment. In addition, there is a psychological factor at work - for foreigners, it is important that Russian oligarchs be invested in the modernization of heavy industry. But those oligarchs use various pretexts to evade this responsibility. For example, UC RUSAL, instead of reducing its production costs, decided that electrolytic refining had no future at Bogoslovsk Aluminum Smelter, where the generating capacity had become worn-out and obsolete because Oleg Deripaska did not make the needed investments at the needed time.

Irina Turgel, the provost of the Urals Academy of Public Administration, believes that the residents of the Urals are used to working in the nation's defense industry and therefore expect the state to modernize their industry. This type of misunderstanding might be very costly for the Sverdlovsk region in a time of economic crisis. This expert feels that the region needs to stop thinking of itself as the "backbone of the nation" and start thinking about ways to pull itself up by its own bootstraps. The faster this happens, the faster they'll see investment.

But surviving won't be easy. The Sverdlovsk region is losing out on the fight for resources, even to its neighboring regions with similar economic structures. Evgeny Animitsa claims that entrepreneurs trust the governor of the Chelyabinsk region, Mikhail Yurevich, more than the head of the Sverdlovsk region, Aleksander Misharin, and therefore prefer to invest in the South Urals. That government is giving them a reason to feel confident. According to Evgeny Sofrygin, the economics minister of the Sverdlovsk region, Chelyabinsk is four times more effective than the Sverdlovsk region at building the social infrastructure that receives subsidies.

Irina Turgel is convinced that an area's competitiveness depends on the effectiveness of its government. Studies show that the regions between the Urals and the Pacific Ocean are not well managed, which affects the attractiveness of the areas and subsequently, their economies. And Natalia Zubarevich predicts that the concentration in the Urals of uncompetitive industries, as well as those that are highly dependent on the global environment for their industry, makes the region vulnerable to a new wave of economic recession. For Aleksandr Misharin's team, this is either a signal for urgent action or a call for an inglorious resignation.

Vladimir Terletsky